DEFINITION of 'Bank Panic of 1907'

A financial crisis that arose near the beginning of the twentieth century as result of a plan to limit the popularity of trust companies. The banking industry was unsettled with the emerging successes of trusts companies, so they attempted to bring financial ruin to F. Augustus Heinze's Knickerbocker Trust in order to falter the public's favor in trust companies. Since the Knickerbocker Trust was unable to receive any financial support from other financial institutions to save itself from failure, the public started to fear that the banking and trust industries were experiencing liquidity issues and thus starting to perform bank runs.

BREAKING DOWN 'Bank Panic of 1907'

The panic was ultimately quelled when the federal government provided over $30 million in aid to the situation, and when J.P. Morgan and others orchestrated deals to bring confidence and liquidity back to the financial markets.

One of the most important outcomes of the Bank Panic of 1907 was the eventual development of the Federal Reserve System. Many felt that the successful implementation of a central bank system could prevent future problems by providing an extra source of liquid assets for financial institutions to tap into.

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